By Adil Yousuf
Coach Inc (COH) reported anemic earnings for its fiscal Q2 (ended December 29, 2012) due to poor sales during the holiday season. The earnings results did not go down well with investors and led to almost 20% drop in Coach's stock price between January and April 2013. Hence, many speculated that Michael Kors (KORS), one of Coach's closest competitor, is taking away market share from the premium brand.
But, three months later Coach came out with all guns blazing and reported a solid quarterly performance. This has led to resurgence in the stock, with investors pushing Coach up by 15% since Q3 earnings announcement on April 24 2013.
Q3 Earnings per share came in at $0.84, above consensus forecast of $0.80. Revenue of $1.19 billion was up 7% from the prior year. Doing most of the heavy lifting was the company's online business which saw double-digit increases in sales and traffic.
In North America Coach managed to stem its same-store sales decline with a 1% increase vs. a 2% decrease in Q2. Outside of North America, business was even stronger where revenues increased by 14%. China remained bright, with sales soaring 40%. To top off the bullish quarter, Coach announced that it was increasing its annual dividend by 12.5% to $1.35 a share.
Based on Market IQ's proprietary Fundamental metrics, Coach is expected to Outperform its peers. Market IQ places Coach in the top right quadrant of the Quality - Value chart (see below), indicating high Quality and Investment Value.
For more insights, visit the Market IQ blog.
The above Quality - Value chart consists of the following companies: Coach Inc (COH), Michael Kors (KORS), Ralph Lauren Corp (RL), V.F Corp (VFC),and LUXOTTICA GROUP S.P.A. (LUX).
The Company's Qualitative strengths can be seen in multiple areas such as Revenue growth, EPS growth and Financial Strength.
- Since the same quarter one year prior, revenues have increased by 7.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- The company has demonstrated a pattern of positive Earnings per share growth over the past two years. Coach improved Earnings per share by 9.1% in the most recent quarter compared to the same quarter a year ago.
- The current Equity to Debt ratio of 2.71 compares favourably to the industry average of 2.13 indicating Coach's strong financial standing in its peer group.
According to Market IQ's Valuation metrics Coach is cheaper than 64% of its peers and offers good upside potential. Coach is currently trading at a Price to Cash Flow of 13.83 and a Price to Forward EPS multiple of 15.13. Both these metrics compare favourably the industry average of 20.41 and 20.54 respectively.
Coach has been strategically executing its branding to transform into a lifestyle brand by moving further into the segments such as shoes and clothing. It has also been trying to expand both its men's product category and its licensing opportunities. The revenue from men's business is expected to double to reach $600 million per year. Product diversification coupled with a focus on preppy gentleman - a lucrative market as evidenced by Gilt and Trunk Club - presents a strong upside potential for Coach.
Perhaps, an even more bullish sign for the stock is the realization that Chinese luxury sales are back. With millions of class-conscious Chinese demonstrating an appetite for Coach, the luxury retailer looks strong going forward.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.